I am still working but can begin a pension from previous job in a month (age 55). I can get $9,023 a year at 55 or $11,904 a year at 65 (a 2.5% reduction each year - total 25%). Or, I can get a $130,000 lump sum at 55. On the monthly pension, I calculate the break even point as the year 2056 assuming no interest. Since I can invest this money, I also ran the age 55 and 65 at 3 through 6% interest and the gap is even greater. Then, I calculated monthly at 55 vs. the lump sum at various interests rates. Again, the monthly at 55 wins out by a significant margin. Am I correct?

Tue Mar 01, 2016 4:34 am

oldguySenior Member

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quote: Am I correct?

No. Except for very low interest rates.

3%- The $9023/y invested at 3% for 20 yrs is $249,725. The $130,000 lump invested at 3% for 20 yrs is $234,794.

6%- The $9023/y, invested at 6% for 20 yrs is $295593. The $130,000 lump invested at 6% for 20 yrs is $416,927.

10%- The $9023/y invested at 10% for 20 yrs is $568472.
The $130,000 lump at 10% is $874,57.

As you can see, as the rates are higher the difference is greater - in favor of the $130k. At very low rates (barely beating inflation) the annuity is higher. And that is what the annuity writer counts on, the insurer will retain the use of the $130,000 and invest it at 10% to 12%. You can do the same if you take the lump sum and invest it at greater than 3%.

BTW, I used 20 years for 2 reasons - (1) a longer term demonstrates the differences better, and (2) too many retirees aim for age 65 and then are surprised that they have even MORE money at age 75, your investments don't stop growing t age 65. (Actually, mine nearly doubled between age 65 an age 76).

Tue Mar 01, 2016 3:43 pm

Mrosa44New Poster

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Thank you. I ran the numbers again at 6%. It came out a little different, but similar. I calculate $360,000 after 20 year annuity at 6% and $418,000 after 20 years with lump sum. About 28 years would be the break even point. Next question - how do I get 6% interest on the investment?

Tue Mar 01, 2016 4:21 pm

oldguySenior Member

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Your numbers are right, I read the wrong line when I got $295593.

quote: how do I get 6% interest on the investment?

I do a top-down mix of my stock fund and my bond fund to arrive at my desired risk level. (I am careful NOT to interfere with the individual pieces. Eg, if I want more risk, I avoid using high yield bonds, instead I change the stock/bond mix.

The SP500 Fund has a longterm historical return of 11%/yr. And bond funds (with 3 year duration) historically return about 5%/yr (yield plus appreciation). Examples -
If you used a 100%/0% mix you'd get about 11%/yr.
A 50/50 mix gives you about 8%/yr (11% + 5%)/2
And 0%/100% gives you 5%/yr.

So, if your desired risk level is 6%, you would use about 18%/82%. If you want a slightly higher risk, you would move to 20/80 - or 25/75.